28 May 2013

Consumption is back - and GDP has no bigger component. Government spending, exports, and investment are all small by comparison to consumption's 70% of GDP. So as consumption goes up, so does GDP.

On September 15, 2008, Lehman Brothers declared bankruptcy. A
month later, the S&P 500 had dropped by a quarter. Two months later, it
had dropped by a third, wiping out trillions in value and triggering the
financial crisis that would become the Great Recession. Jobs losses during the
next 12 months would total more than 6 million - this in an American economy that had
never ever created 6 million jobs in a single year. (Or even 5 million jobs, only once creating more than 4 million jobs in all of American history.)

The good news is that we're recovering. The stock market has bounced back. The
housing market is bouncing back, up nearly 11% in the last year with its biggest annual gain in 7 years.

In the three months before the Lehman Brothers' bankruptcy, Gallup's measure of daily spending averaged $96; in the three months after, the average dropped to $86. It got worse the next few years: in 2009, 2010, and 2011, it averaged $64, $65, and $68, about a third less than what it had been prior to Lehman Brothers. Given consumption matters so much, this dip in spending was a huge drag on the recovery. But that's changing.

So far this year, average daily spending is $85. That's still not where it was before Lehman Brothers, but it is up 30% from 2009 through 2011. Last year the 3-day moving average broke $100 only 7 times; already this year it has broken $100 15 times.

This far exceeds what it was in 2010 when daily spending broke $100 only twice - the 22nd and 23rd of December. In 2011, it broke $100 only on Black Friday.

It's only Memorial Day but already beginning to look a lot like Christmas. At least to retailers. And that could make the biggest difference of all.

This doesn't depend on any theory. It simply states that total economic activity is equal to all the money households spend buying stuff (C), plus all the money the government spends on buying stuff (G), plus all the money people invest (I) plus what we make from selling exports (X) minus the money we spend on imports.

For instance, in 2010, the equation for GDP for the US looked like this:

If we had sold another trillion in exports or invested another trillion or spent another trillion on consumption or government spending, GDP would have been $15.6 trillion.

Now this says nothing about whether you like how the money is spent. A dollar of consumption (C) spent on a strip club adds to the total as much as a dollar of consumption spent on ahip replacement for a 92 year old adds to the total as much as a dollar for new stained glass windows for the church adds as much as a dollar some little kid spends on ice cream. Economic accounting like this doesn't make any judgments on how people spend their money.

In the same way, a dollar of government spending spent on defending the nation against terrorists is treated no differently than a dollar spent on educating the young is treated no different than a dollar spent on building a road for a corporation is treated no differently than a dollar spent on a welfare mother. Again, it's just different ways that the dollar gets spent in order to raises total Government spending (G), which in turn raises GDP.

Now it is true that a dollar spent on developing the Internet or solar power is likely to lead to higher GDP in the future. Investment is more cool than the other elements of GDP. But of course, only up to a point. If we only invested and didn't consume, we'd quickly die out, like people who turned all their corn into seed corn and starved to death. You can - and should -argue about how much to invest and in what. But I is just another component of GDP and the more we invest, the higher GDP that year.

If you lower C or I or G or (X-M), you will lower GDP. This is not theory. This just results from simple definition.

If you lower G (government spending) GDP goes down. This is the same thing that happens if you lower C or (X-M) or I. And yet we hear all the time that if only we lowered G, GDP would go up. I still haven't figured out the math on that.

It is legitimate to argue about what is the best mix of these. The question of how to increase exports and investments seems really important. The choice about what sorts of investments to make seems really important. But the strategies to do that need to recognize that such changes take time and will span business cycles. The right time to talk about lowering G is when C or I or X are rising. To lay off government workers or government contractors when unemployment is high just lowers GDP by lowering G and giving GDP no offsetting rise in any other component.

Instead, I'll criticize the board and major investors for thinking that money was a substitute for time. It is hard to imagine that people in charge of so much money are actually that naive. It could be that Ron Johnson would have been a bust but who could know after 17 months?

Ron Johnson was hired away from Apple. He'd been in charge of the stores. And Apple stores are a retail phenom. For instance, Apple's Stores had the highest sales per square foot of any retail stores. Johnson knew the formula for magic and could obviously bring that into JC Penney. Or so the board must have thought.

But if there is a formula for business success, surely time and inspiration are more important inputs than money.

Steve Jobs had secretly built a prototype Apple store near the Cupertino headquarters and would spend time in the place re-thinking the retail experience. He would get insights and send the architects and builders scurrying. As he had with the design of the iPod and iPhone, he was hands on, giving input and obsessing over details. He described design as having to hold 5,000 pieces of information in your mind and find ways to fit them together, information about the behavior of customers, plastic, and electronics and how they play together for instance. (Which, it seems to me, is a wonderful way to describe systems thinking.) This secret process of Steve Jobs (which did include Ron Johnson about one year) took about 2 years.

So let's review the numbers.

Steve Jobs was CEO about 4 years before opening his first Apple Store and had spent at least 2 years - probably all four years - finding time to redefine the retail experience for Apple consumers. So Jobs took about 24 to 48 months to change the retail experience.

JC Penney was founded in 1902, about 111 years before they fired Ron Johnson. JC Penney has been operating about 1,332 months

Ron Johnson was given 17 months as CEO. 17 months to turn around this company of 1,332 months.

Yeah. That will work.

There is an old cliche in project management about paying 9 women to have a baby in one month. Sometimes, you just can't pay your way out of a problem. The board at Penney's tried and cost their stockholders about 50% of the stock value.

22 May 2013

Early stage entrepreneurship levels are at their highest levels since at least 1999.

Professors from Babson and Baruch Colleges have just issued their 2012 Global Entrepreneurship Monitor (GEM). This report attempts to capture entrepreneurial activity on the ground - not just startups funded from venture capitalists or banks. And the news looks good. Entrepreneurship is on the rise.

First generation immigrants are even more likely - at 16% - to be engaged in entrepreneurship

There are 7 female entrepreneurs for every 10 male entrepreneurs

Three-fourths of entrepreneurs do it to pursue an opportunity rather than out of necessity

37% project a business with 5 or more employees in 5 years

A couple of negatives are the obstacles mentioned. Compared to similar countries, American entrepreneurs have more trouble with financing and struggle more with fear of failure. It seems to me that communities could do a lot to alleviate the first and corporations could do a great deal to alleviate both problems.

Compared to other innovation-driven economies, the US has twice the rate of "stops" stemming from financing failures. Venture capital markets are strong but only a few entrepreneurs qualify. This suggests to me that governments would do well to create something for entrepreneurs akin to college loan programs, a way to subsidize small entrepreneurs.

And as to fear of failure, that still suggests to me that corporations would be wise to harness the high-levels of entrepreneurial initiative in this country by creating more opportunities for entrepreneurship within their business. My guess is that many optimistic entrepreneurs who are now employees would think it a great deal to avoid the risk of salary loss in return for giving up something like half of their expected profits. Do corporations have money to invest in such ventures? Well, only if you count the $2 trillion in cash (by some estimates $5 trillion in liquid assets) held by the Fortune 500.

Total Early-Stage Entrepreneurial Activity (TEA) is up, according the folks at Babson and Baruch Colleges. And it will just continue to rise if my theory about our entering a fourth economy has any merit. If that is true, this TEA measure could become to the future what the Dow Jones Industrial Average has become. That is, a way to measure something terribly important that has - nonetheless - eluded quantification until now. And as communities become more savvy about the importance of entrepreneurship, watch this index become as common as the Dow.

20 May 2013

If I remember correctly, when Richard Dawkins coined the term "meme" he was not thinking about Facebook. Dawkins was trying to find a way to describe the cultural equivalent of a gene as a way to talk about practices that become a part of a culture. He thought it might add a little formality to the notion of social evolution as companion to species evolution, the mutation of memes changing peoples and cultures in the same way that the mutation of genes changes species. Practices that spread, like democracy and blue jeans, are memes. It's a great idea, and meme itself has become an incredibly pervasive meme. It's also radically mutated to look a bit like a virus.

Now, every bright shiny object on the Internet has become a meme. Or at least it gets called that. Of course a video of the world's smallest monkey eating elbow macaroni does capture consciousness, just like the Bill of Rights or the idea that we ought to drive on the right side of the road. But it doesn't actually inform behavior, doing less to inform who we are than distract us from that. Instead, it's just a distraction, a way to transform consciousness into page views (which, in turn, can be transformed into advertising revenues).

Consciousness is under assault. It's odd. Never before has humanity been more free to live as they wish and yet never before has the world offered so many alluring enticements from one's own thoughts, making it difficult for the individual to define novel ways to live. From movies and TV shows to books, art, museums, and lectures, the world offers thousands of options for structuring our consciousness for us, even outside of work. Worse, many of these same memes can become viruses, not so much structuring consciousness as distracting it.

But I digress. To be distracted is to be human in this Information Age. We all do it. Trust me that I daily exceed the average quota of things found fascinating. But the notion that we're being distracted by something as sexy as a meme is a form of self-delusion. These aren't memes: they're badly mutated versions of Dawkins' original meme, something more akin to a mind virus than gene. I'm not suggesting that we stop being amused, intrigued, shocked, and entertained; I just that we owe it to ourselves to properly label the sources of all that.

[This blogger will leave you to determine if the preceding rant was a public service announcement, something akin to a meme, or was itself a mind virus, the blogging equivalent of a onomatopoeia.]

17 May 2013

People have been fired. Mike Huckabee predicts that Obama won't complete his second term. At a minimum, Bloomberg Businessweek predicts, Obama's hope for gun legilsation, immigration reform, and a health overall are to be jettisoned. This IRS scandal is a big deal.

So what, exactly, is the big deal? The IRS targeted tea party like groups but not progressive groups. They were searching for folks who had formed groups around the notion of patriotism, tax relief, and anti-government sentiments. This much seems true and for that people have been fired.

So then, what nefarious things did they do once they'd targeted these groups? They requested information. Specifically, they asked the following questions:

These questions were deemed "unnecessary."

That's right. These groups had to answer questions they didn't have to. They weren't shut down. They weren't fined. Their members weren't subject to wire-tapping. Their leaders weren't imprisoned or targeted by drones. Nobody was water boarded. They were asked to provide information.

That's the big scandal.

We live in time when we're about to hit a big inflection point. Going one way, we could enter a time of prosperity that past generations could not even imagine. Going another way, we could enter a time of unfolding disasters. And in the face of that, the government with the most influence of any group in the world is focusing on an issue that is - depending on the angle from which you observe it - either inane or irrelevant.

We don't really have to worry about what future generations will think of us, though. With judgment about real vs. trivial issues this faulty, we're likely to cause our own extinction before those future generations can show up to judge us. That will shut them up.

16 May 2013

Daniel Kahneman begins his book Thinking Fast and Slow with a picture and an equation.

In an instant, 90% of people know that this girl is mad.

By contrast, 90% of people take at least a few seconds to calculate the answer to this equation.

37 X 4.

Some things we can do so quickly and effortlessly that we don't even think that we're thinking. Other tasks make us very aware that we're thinking.

The media - and by extension the political dialogue - is defined by the fact that we can instantly judge scandals but it takes time and effort to judge policy. (Not that we always resort to actual judgment for policy; once we know whether a particular proposal is considered liberal or conservative, we can judge it as quickly as we can this little girl's mood.)

The federal government has nearly 3 million civilian employees. When they do something wrong, the question is whether it actually stems from policy or - even better for the media - conspiracy. If they were just acting on their own - mavericks in the system - it may qualify as a scandal but it is no indictment of the White House. (Unless, of course, you have mavericks in the White House like McCain and Palin who would, presumably, encourage maverick behavior.)

Abu Ghraib and My Lai were atrocious but don't seem to have been the result of either White House conspiracy or policy; neither Bush nor LBJ were ever indicted in these awful acts and it would be unfair to judge them by those events.

By contrast, it really is fair to judge LBJ and Bush by the wars (occupations?) of Vietnam and Iraq. Those are the result of policy, choices that emanated from the White House. It's harder to judge whether those were good decisions. My Lai and Abu Ghraib? We can all confidently criticize those as wrong.

Conspiracies never make as much difference as policies. Abu Ghraib and My Lai did not kill as many people or cost as much money as the Iraq and Vietnam wars, did not have as much impact on the region.

Yet policy is boring. It requires slow thinking, the same plodding thought that solves equations. Scandals, on the other hand, are exciting. It lets us rely on fast thinking, letting us judge them almost instantly. They make us feel smart because they are easy to think about.

Scandals rarely matter. Policy almost always does. And yet savvy media and politicians will continue to feed us scandals and largely ignore policy. Not because that's a smart thing to do when it comes to running a country. Instead, they do it because it makes us - and them - feel smart.

15 May 2013

The random walk hypothesis is simple. Today's stock prices predict what we know today. Tomorrow we will discover new information and that information is as likely to be bad as good - it is random - so future changes in stock prices are random. Put simply, we can't predict the future.

I think that events are more connected than that, more likely to form a part of larger patterns. And because of that, news tends to come in the form of clusters, bad news bringing more bad news and good news bringing more good news.

It is hard to argue that these events are unconnected. Most obviously, an improving economy will make the deficit smaller. But it would be hard to argue that any of the above events are unrelated. A better stock market gives people more confidence to buy things and gives companies more confidence to hire people; as more people get hired, they buy more things; as companies sell more, they hire more people. Effect becomes cause and pretty soon we don't so much see individual dominoes falling as patterns: news about home sales or hiring is slowly displaced by more general reports: the economy is strong. Better news means even more better news.

And that more general pattern is driven by the emergence of simple consensus more than folks care to admit.

Economics is a bit like fashion: it gets defined as much by agreement as "real" issues.

It seems as though communities around the US have begun to build agreement that the economy is good and it is again time to buy homes and stocks and to hire people. That will make it so for months - probably years - to come. That may seem arbitrary but it is not random.

This poor excuse for a human being, Judge Mark Ciavarella, was putting kids as young as 10 years old into prison. Not for the crimes they'd committed but instead for kickbacks from the for-profit prison system into which the kids were sent. Hard to imagine a more vile piece of humanity than Ciavarella. The Pennsylvania Supreme Court overturned 4,000 of his convictions. 4,000. I guess it's easier to do such things when you've already sold your soul.

His sentence was not harsh enough. A 28 year sentence to a 61 year old man might be enough, but a million dollar fine for a million dollar profit is not. For other judges and for-profit prisons, this could just be seen as a cost of doing business, and not even a high enough cost to stop such practices.

The reason it is not enough is because the odds of getting any sort of fine are so low.

The odds that Ciavarella would be caught were less than 100%. There was maybe a 20% chance, say. The odds that the DA would decide to prosecute were less than 100% - perhaps about 50%? And finally, the odds that he'd be found guilty were less than 100% - again, maybe 70%? (And yes, I'm making up these numbers; the only thing that I know for sure is that the odds of his making it to each stage are less than 100% and by 10's of percent.) So by these calculations, the odds that Judge Ciavarella would be caught, prosecuted, and found guilty were about 7% (20% X 50% X 70%).

So if you are another judge who is amoral enough to look at the incarceration of the young as a for-profit venture, you could easily make the following calculation. "I could make a million dollars by giving out the maximum sentence to these kids. Money I'd get in kick backs for the cost of their incarceration. Money paid by taxpayers to the for-profit prison company." Then you'd have to ask about possible costs. By the above calculations, the probable cost of this venture would be about $70,000 (7% of the million). Now you can make your own calculations about probabilities but no matter how you do it, you'll find that a fine equal to the reward for criminal behavior is inadequate. It would only make sense if the odds of being caught, prosecuted, and found guilty were 100%. They're not.

I'd suggest that the judge's fine should have been at least $15 million, not merely $1.2 million. And who could make up the difference? The for-profit prisons.

03 May 2013

After the
Mona Lisa was stolen in 1911, the lines to see the space where it had once hung
were longer than the lines had previously been to actually see the painting.

Of course any reputable country music artist could tell you
that absence is a great way to be noticed. Curiously, and rather fittingly,
Kafka was among the folks who cut short a vacation to rush to the Louvre to see
this blank piece of wall upon which the
Mona Lisa had once rested.

Should ever happen again,
I think that it would be all the more reason to have a museum of forgeries. (Such a museum would provide an identical art experience to the real art and yet acquisition costs would be much lower, no?) I'll have a blank wall
in my museum of forgeries with a sign that says, "It's not here either."

So, I've discontinued my experiment to determine whether the lines to see - or rather, the hits on the blog - were greater with missing posts.

Before you leap to the conclusion that this blog has been abandoned, I would like to point out that I've been busy. In the last five weeks I've been in four states (not counting this one) in three different time zones (trips of 2 to 5 nights), been able to visit a new major league ballpark and the rock and roll hall of fame, driven through a snow storm, looked after my elderly father, and started work with two new clients.